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FINC 322 > Chapter 6 > Flashcards

Chapter 6 Flashcards

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1
Q

Bond’s coupons

A

The stated interest payment made on a bond

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2
Q

bond’s face value (definition and also called)

A

The principal amount of a bond that is repaid at the end of the term. Also called par value or nominal value.

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3
Q

Coupon rate

A

The annual coupon divided by the par value of a bond.

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4
Q

Bond’s maturity

A

Specified date on which the principle amount of a bond is paid.

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5
Q

Most common length of a bond

A

30 years

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6
Q

yield to maturity (YTM)

A

The rate required in the market on a bond

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7
Q

Equation for total bond value

A

present value of par value at market rate + present value of annuity with coupon as payment and market rate

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8
Q

interest rate risk

A

risk that arises for bond owners from fluctuating interest rates

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9
Q

What influences interest rate risk

A
  1. Time to maturity–the longer the time, the greater the risk
  2. Coupon rate–the lower the rate, the greater the risk
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10
Q

Unfunded debt

A

short-term debt securities

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11
Q

Indenture (definition and also called)

A

the written agreement between the corporation (the borrower) and its creditors. Also called deed of trust.

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12
Q

What must the trust company do in relation to a bond?

A
  1. make sure the terms of the indenture are obeyed
  2. manage the sinking fund
  3. represent the bondholders in default
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13
Q

What is generally included in a bond indenture?

A
  1. The basic terms of the bonds.
  2. The total amount of bonds issued.
  3. A description of property used as security.
  4. The repayment arrangements.
  5. The call provisions.
  6. Details of the protective covenants.
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14
Q

bonds in registered form

A

The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record.

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15
Q

bond in bearer form

A

A bond issued without record of the owner’s name; payment is made to whomever holds the bond.

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16
Q

debenture

A

Unsecured debt, usually with a maturity of 10 years or more.

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17
Q

note

A

Unsecured debt, usually with a maturity of under 10 years.

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18
Q

seniority

A

indicates preference in position over other lenders

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19
Q

sinking fund

A

An account managed by the bond trustee for early bond redemption

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20
Q

Call provision

A

Agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity.

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21
Q

Call premium

A

The amount by which the call price exceeds the par value of the bond.

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22
Q

deferred call provision

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A

Bond call provision prohibiting the company from redeeming the bond prior to a certain date.

23
Q

Call protected bond

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A

The bond is said to be call protected during the period stated in the deferred call provision.

24
Q

Protective covenant

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A

A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interest.

25
crossover bonds (definition and also called)
Rated triple-B by one rating agency, and double-B by the other. Also called 5B bonds or split rating
26
zero coupon bond (definition and also called)
A bond that makes no coupon payments, and thus is initially priced at a deep discount. Also called zeros or pure discount bonds.
27
Floating-rate bonds (definition and also called)
The coupon payments are adjustable and adjustments are tied to an interest rate index. Also called floaters
28
Features of most floaters
1. The holder has a right to redeem the note at par on the coupon payment date after some specified amount of time. 2. The coupon rate has a floor and a ceiling.
29
collar
The upper and lower rates of a capped floater
30
TIPS
Treasury Inflation-Protected Securites. inflation-linked floater issued by the US Treasury
31
Structured notes
bonds in which returns are based on prices for stocks, bonds, commodities, or other currencies.
32
Convertible bond
a bond that can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option.
33
Put bond
Allows the holder to force the issuer to buy the bond back at a stated price.
34
TRACE
Trade Reporting and Compliance Engine. Corporate bond dealers are required to report trade information through this.
35
Clean price
The price of a bond net of accrued interest, meaning the accrued interest is deducted: this is the price that is typically quoted.
36
Dirty price
The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
37
nominal rates
Interest rates or rates of return that have not been adjusted for inflation.
38
real rates
Interest rates or rates of return that have been adjusted for inflation.
39
Fisher effect
The relationship among nominal returns, real returns, and inflation.
40
nominal rate equation
R=r +h+r(h) where, R=nominal rate r=real rate h=inflation rate
41
term structure of interest rates
The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money. The relationship between short-term and long-term interest rates.
42
Term structure is upward sloping
long-term rates are higher than short-term rates.
43
Term structure is downward sloping
short-term rates are higher than long-term rates
44
Term structure is humped
rates increase at first, but then begin to decline as we look at longer- and longer-term rates.
45
interest rate risk premium
The compensation investors demand for bearing interest rate risk.
46
What affects the term structure
1. Real rate of interest 2. The inflation premium 3. The interest rate risk premium
47
Default risk premium
The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
48
Taxability premium
The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
49
Liquidity premium
The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
50
Six factors that influence bond yields
1. Real rate of interest 2. Expected future inflation 3. Interest rate risk 4. Default risk 5. Taxability 6. Lack of liquidity
51
Bond price is equal to
The present value of all the future cash flows discounted at the yield to maturity or required rate of return by investors or the market.
52
current yield equation
dollar coupon per year/price
53
When coupon rate > yield then price
>par = premium bond

FINC 322 (9 decks)

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